Federal Reserve Chair Jerome Powell is expected this week to cement expectations that the central bank will slow the pace of rate hikes next month, while reminding Americans their fight against inflation will last until 2023 will last.
Powell is scheduled to deliver a speech nominally focused on the labor market at an event hosted by the Brookings Institution in Washington today. It will be one of the last engagements by Fed policymakers before the start of a quiet period ahead of their December 13-14 rate-setting meeting.
The event provides Powell with a stage to join other Fed officials in signaling that they will raise US interest rates by half a percentage point at their final meeting of the year, after four consecutive three-quarter-point hikes.
But with inflation still well above the central bank’s 2% target, he is likely to combine any talk of a cut with a warning that rates will need to rise further next year.
Investors expect the Fed to slow next month, with interest rates rising about 5% next year from the current 3.75% to 4% range, according to the pricing of contracts in the futures markets.
Those expectations are consistent with Powell’s comments after the Fed meeting earlier this month, when he suggested officials could slow rate hikes as early as next month, even if they end up raising rates higher than previously thought.
Officials saw in September that rates hit 4.4% by the end of this year and 4.6% by the end of next year, according to median forecasts released after that meeting. These forecasts will be updated at next month’s meeting.
BENEFITS 5%
Two Fed officials said Monday that they favor raising the Fed’s interest rate to about 5% or more and keeping it at its peak into next year — longer than many on Wall Street expected.
John Williams, president of the Fed Bank of New York, who belongs to a core group of officials surrounding Powell, said in a speech to the Economic Club of New York that the central bank had “more to do” to bring down inflation.
And St. Louis Fed President James Bullard has suggested that financial markets are underestimating the likelihood that the Fed will have to become more aggressive in its fight against the worst inflation in four decades.
In an interview with Marketwatch, Bullard hinted that the pace of the Fed’s rate hikes isn’t as important as the eventual level of its benchmark interest rate, which he thinks could exceed the 5% that financial markets have been pricing in.
The central bank, he added, will likely need to keep interest rates above 5% through 2023 and into 2024. He also reiterated his view that the Fed should be prepared to raise that rate to the “lower end” of a range between 5% and 7%.
In contrast, financial markets have been forecasting that the Fed will have to reverse course and begin cutting interest rates by next September, likely in response to a recession many economists are expecting for next year.
Williams suggested that there are some positive signs that inflation is easing, noting falling prices for lumber, oil and other commodities. Supply chains are also loosening, he said.
Still, the job market has remained stronger than expected, Williams said, with the jobless rate still low at 3.7% for nearly half a century.
“This suggests we need to have a slightly higher path for interest rates” than the Fed forecast in September, Williams said. At the time, officials forecast that their policy rate would hit a range of 4.5% to 4.75% by early next year.
He now expects the unemployment rate to rise to 4.5% to 5% by the end of next year and inflation to fall to 3% to 3.5% by then.
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